Macroscope | Don’t expect Fed liftoff on rates to end uncertainty for emerging markets
Emerging market policymakers grouse uncertainty is stoking market volatility
Two years ago, emerging market (EM) policymakers, to say nothing about international investors, were terrified by the prospect of a tightening in US monetary policy.
Even the hint of a scaling back, or “tapering”, of the Federal Reserve’s asset purchases was enough to trigger a sharp sell-off in EMs, resulting in heavy outflows from EM equity and bond funds.
Yet at the annual meetings of the International Monetary Fund (IMF) and World Bank in Peru last weekend, the views of EM policymakers were much more nuanced.
The Fed’s dithering is amplifying vulnerabilities and risks in markets
For some EM governments and central banks, the Fed’s decision not to raise its benchmark interest rate last month was a mistake on the grounds that it has prolonged the uncertainty surrounding US monetary policy, fuelling volatility in markets.
“This year, compared to a year ago, many [EM] central bank governors and some others were keener that the Fed just get on with it, not because they were keen to see interest rates rise, but because they wanted to reduce uncertainty”, noted Tharman Shanmugaratnam, Singapore’s deputy premier.
Still, it is not at all clear whether a rate hike would have been well received by markets judging from the erratic performance of EM equities since the Fed announced its decision on September 17.
EM stocks fell 7 per cent in the 10 days following the Fed’s decision but have risen 8 per cent this month. This week, EM equities were falling once again.
Volatility has been the watchword for sentiment towards EMs since the Fed’s decision to keep rates on hold.